Tuesday, August 14, 2012

"Yes, but ..." : Toronto Life edition, part 1 (of several, I suspect)

I'm back. Again.  Sorry about that.  As of the last post we were preparing to move.  Work busy-ness, the move and a pair of truly nasty summer colds put the blog on the black blurner for a while.

But as I was pondering the next post, along came the September 2012 issue of Toronto Life with the cover story "House Wars".  Under the headline ... "Too many buyers. Not enough houses. Extreme tales from the real estate market"

Weeeeellllll, this ought to be good for a whole string of posts.

Sure enough, here I go.  And I haven't even read the article yet.  The "Editor's Letter" lays out the tale of a couple who bought a house in 1972 and just sold it for over $1.4 million (and yeah, a whole bunch over list price).  Bandits.  Baby boomers cash in. Young'uns can't afford a cardboard box under the Gardiner.

I'm not saying these folks didn't do well.  They did.

But let's come at it a little differently and maybe suggest they did just that ... "well".  Not outrageously, or insanely. Just "well".

In the example, the buyers picked up a dump in a very untrendy neighbourhood.

So, their location means they took a risk.  Risk-takers deserve a little higher return when their risks work out (because they will get creamed when they don't).  Just keep that in mind.

And they have spent piles of cash restoring, renovating to bring the place up to snuff.  Without knowing what they did or when, I have just pretended they paid $50,000 in the first place.

Their annual rate of return on their investment: 8.5%.  That may still sound pretty awesome, but don't forget that this is an average and includes periods where inflation was double-digit (and mortgages were going at 18%).  One source I checked (actually I googled it and only checked one source that looked pretty credible) suggested a representative stock market purchase would have returned over 11% for that 40 year run.

Actually, that's a good idea. Let's take inflation out.  If I've done the math right, their "real" return after inflation now comes out to a little over 4%.

Finally, I note that the editor says the sale discussed will "play a big part in funding their retirement".  Probably true ... IF they rent or downsize or move to a lower-priced market (good deals in Welland these days).

I'm not suggesting the market hasn't been nerve-tingly hot.  For quite a few years, many wise folk have been wondering when it will slow, settle, correct, crash, whatever.  It hasn't done it yet. It may. It may not.  But I'll also bet that when I post this and head back to the actual article I'm going to find stories that are a whole lot less dramatic than their headlines (and our resulting emotions and outbursts) initially suggest.